RBI likely to cut repo rate by 25 bps: Goldman Sachs

MUMBAI: Reserve Bank of India is likely to cut repo rate by 25 basis points in the April policy due to weak economic activity, benign inflation and soft global growth, says a report.

The monetary policy committee is scheduled to meet from April 2 to 4.

"We now think a 25 basis points cut is likely in the April meeting. Our thinking is driven by three factors- continued weakness in economic activity, still benign inflation and soft global growth, and a dovish Fed," Goldman Sachs said in a report.

It expects inflation to remain below the RBIs medium term target until the end of 2019.

The brokerage expects some pick-up in growth over the course of this year, and forecast real GDP growth to increase from 7.1 percent in FY19 to 7.5 percent in FY20.

Headline CPI inflation rose to 2.6 percent in February, reversing a declining trend since July 2018.

The report lowered its inflation forecasts and now see average headline CPI inflation at 3.4 percent in FY19 compared to 3.6 percent before.

It expects some pick-up in food inflation over the course of the year as favourable base effects begin to wane and momentum builds as indicated by the recent prints on consumer and wholesale prices.

"Based on our outlook for food, partly offset by lower commodity prices, and a stable core, we forecast average headline inflation to rise from 3.4 percent in FY19 to 4 percent in FY20," it said.

The brokerage had earlier expected no change in the policy rate in the April meeting.

It, however, said a decision to hold rates steady at the April meeting remains a significant possibility.

"Should policymakers continue to be in a wait and watch mode to gauge the progress on transmission of the past rate cut in February, they may choose to loosen later rather than sooner," the report said.

The brokerage expects another rate cut by the RBI by 25 bps in the third quarter of 2019.

"Going forward, in 2020, as growth accelerates, headline inflation begins to pick up, and Fed begins to increase rates, we expect pressure to build on the RBI to shift back to a tightening mode," it said.

The brokerage said RBI may increase rates next year - one hike of 25 bps each in Q1 and Q2 of 2020.

A recent Allahabad high court judgment may, however, provide some relief with the court ruling that there shall be no tax levied in case of purchases made at duty free stores at the arrival or departure terminals.